Analyst: Nook division is ’festering sore’ for Barnes & Noble

While the pace of decline at B&N has eased, the company remains firmly in decline with sales down across the board. The saving grace is that a firm grip on costs, which were slashed by $137 million over the year, allowed the group to reduce losses for the quarter, and to post a $22 million net profit for the full fiscal.



Helpful as they are, cost reductions do not hold the key to a sustainable future for B&N. Indeed, we would argue that they are simply a necessity of a business that is still losing customers and their spend. To be successful, B&N must, at the very least, stabilize its top line.



This challenge falls to new CEO Demos Parneros, who took up the role in April after serving as operations director for around half a year. In our view, this change in management could be a good thing for B&N, if it injects some fresh thinking into the business.



The start point for Parneros should be the Nook division. In our opinion, this has been a festering sore for too long and, despite severe cost cutting, it still made a loss of $7.9 million this quarter. We see very little future in this area: overall e-book growth is waning, and B&N's weak position in the segment means it will suffer more than most.



We have noted that B&N is moving the Nook section in some stores from its prominent front-of-shop location to a more obscure position near the customer service area. In our view, this is a sensible relocation and, perhaps, one that finally signals the beginning of the end of Nook.



Rather than toying around with Nook, B&N should focus more squarely on its online operation. This part of the business is in desperate need of attention, as is evidenced by the 2.9% growth rate for the quarter. This is an unsatisfactory outcome and shows that the small investments in digital made over the past year are not paying dividends. In our view, B&N is simply not an online destination for many shoppers buying books and associated items - something that the company needs to correct.



Away from online, changes also need to be made to stores. Parneros appears to believe in investing in shops and wants to keep most of the current fleet open. That said, we do not preclude a handful of closures, particularly since around 500 leases will come up for renewal over the next five years. From a financial standpoint, this affords the group the flexibility to re-engineer the business should circumstances require it.



New smaller formats, different configurations, and larger cafe spaces may all help on the store front. However, we are reserving judgment as to how effective these shifts may be. Essentially, we see many of the current changes as gentle transformations rather than bold initiatives to revive the fortunes of B&N.



The good news for B&N is that it has some breathing space thanks to its cost disciplines. It also has a solid base of loyal shoppers through its membership and loyalty scheme. These are insufficient to guarantee the long-term future of the firm, but they provide a solid foundation on which the company can build -- if it chooses to do so.